A business plan is vital for new or expanding companies

Written outlines provide goals and blueprint for reaching them

Whether you’re starting a new business venture or trying to grow an existing one, a written business plan should be an essential cog in the machinery of your enterprise.

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“The simple act of writing down your idea and outlining how the business will operate can be helpful to ensure that you communicate your vision and that everyone is on the same page,” says to Patrick Hull, a serial entrepreneur and frequent contributor to Forbes magazine. “It also helps you benchmark and check your progress as the company grows.”

If you’re going to need financing to support your business, it’s virtually certain that your bank or your investors are going to require that you present them with a business plan. But even if you intend to self-finance your business idea, spending the time and energy and completing the pain-staking research to develop a well-considered business plan can be a valuable exercise.

A business plan maps out how to achieve your goals.

“The business plan is like a roadmap—or maybe more like a GPS in today’s world,” said Jill Beresford, senior business advisor at the Massachusetts Small Business Development Center (MSBDC), which provides free counseling services to anyone who has a small business or is thinking about starting one.

“No one can predict the future,” she said, “but you can certainly try to plan for it by learning as much as you can about your competition, how to brand your product or service, how to get competitive advantage, how to make money, and so on.”

What exactly is a business plan?

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Simply stated, a business plan is a formal, written statement that outlines a company’s business goals, the reasons it believes those goals are attainable, and the strategies the company will undertake to meet those goals. The plan should be reviewed and revised regularly as the company moves forward.

The U.S. Small Business Administration (SBA), which provides a step-by-step guide to writing a business plan on its website, notes that the typical business plan “projects three to five years ahead and outlines the route a company intends to take to reach its yearly milestones, including revenue projections. A well-thought-out plan also helps you to step back and think objectively about the key elements of your business venture and informs your decision-making on a regular basis.”

William A. Sahlman, a professor at Harvard Business School, has suggested that a great business plan focuses on a series of questions that relate to four factors critical to the success of every new venture: the people, the opportunity, the context, and the possibilities for both risk and reward:

What do the people know? Who do they know? How well are they known?

Is the market for the product or service large or growing? Is the industry structurally attractive?

Does the entrepreneur have a thorough understanding of the context in which the venture will operate? And how will he or she respond when the context changes?

Is there a realistic view of the challenges that lie ahead? And, importantly, what magnitude of reward can be expected from the venture and when?

“It takes a tremendous amount of work to garner all the relevant industry and market data that help the business owner understand the opportunity and the challenges ahead,” said Beresford.

“But without a business plan, you’re kind of driving blind. It’s the difference between being in a reactive mode as opposed to being proactive, seizing control of the business, and taking care of issues as they come up.”

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A plan for expanding the business

Writing a business plan isn’t just for new ventures. An already-established company may find itself needing to write or revise one as well, especially if the company is looking for financing and its past performance may not support its taking on new debt.

Here’s what a firm in that position can expect:

Banks typically look for specific debt-to-income ratios when considering a loan request. If the numbers don’t line up, a banker might require that a potential borrower present a business plan.

“We will sometimes consider moving forward with financing based on a business plan that explains to us why the numbers are going to be better going forward,” said Rockland Trust business banking officer Itamar Chalif. “The business plan will give us a glimpse into the future and explain what the borrower plans to do differently to support taking on additional debt. We’ll want to know what’s happening in the business that will make things better—like a change in the industry that can be exploited, or a new product or service, or going after a new market.”

Business owners also need to understand the importance of working on the business, as opposed to working in the business, Chalif added, and the business plan is typically the first step toward that.

“You need to plan your exit from the business on the first day you start it,” Chalif advised, “which is to say that you should have a vision of how you want to transition the business to a successor, whether it’s a family member or a competitor or a complete stranger. The business plan should be aimed at supporting that vision.”

Chalif notes that it typically takes 5 to 10 years to properly plan an exit so as to maximize the value of the business and reduce the tax implications.

“The business plan is one of the tools that is crucial to accomplishing the exit strategy,” he said. “Without it, you’re usually just treading water or simply lucky.”

Filling out the paperwork

A business plan is only as good as the research and information the business owner provides. There are numerous books and online resources available to help with the writing process. As mentioned, the SBA website may be a helpful jumping-off point.

In general terms, here are the highlights of an effective business plan:

Executive summary– A clear and concise summary of your business, including the company’s value proposition, how it will make money, and why people will choose you over the competition.

Market opportunity– Define your target market, its current size, and its growth dynamics. Identify the opportunities and the challenges.

Competitive environment– Who will you be selling against? What is their market share? What are the strengths and weaknesses of their offerings?

Experience– What skills, qualifications, and track records do your key team members possess?

Operational execution– Describe the inner workings of your business model, how much money it stands to make, and when positive cash flow will be become sustainable. This is where past financial performance (if applicable) and financial projections are inserted, with particular emphasis on forward-looking profit-and-loss, balance-sheet, and cash-flow statements.

Another consideration if you’re a first-time entrepreneur, according to Beresford: No lender is going to consider financing you if your FICO credit score isn’t up to snuff, so be sure your score is above 650 at a minimum. Be prepared also to know that your lender is going to look to secure your financing request with sufficient collateral to repay the loan if you’re not able to meet your obligation. You may be required to pledge personal assets or, in some cases, business equipment to collateralize the loan.

A business plan is the beginning of an ongoing process of close examination and refinement. Its real value is unlocked when used as an instrument for reflection.

“If you’ve done a business plan,” Beresford concluded, “you can go back and look at what you said you were going to accomplish and figure out where you may have gone off the rails or where you’re doing better than expected. It provides the GPS reading to help you correct course or go full speed ahead.”